Kinross Reports In-Line - Analyst Blog

Gold miner, Kinross Gold Corporation (KGC) recorded net income of $103.8 million or 15 cents per share in the second quarter of 2010, significantly higher than last year’s $19.3 million or 3 cents. Excluding one–time charges, the company earned $113.1 million or 16 cents, in line with the Zacks Consensus Estimate.
 
Quarterly revenues leaped 16% to $696.6 million on a 27% hike in average realized gold price to $1,158 per ounce. Pricing gains offset an over 5% decline in gold sales volume to 551,958 ounces of gold. Gold production also declined 4% to 538,270 ounces driven by lower-than-expected output at the mines in Chile and lower grades at Kupol. Healthy revenues led to a 43% increase in operating income to $220.5 million despite a 14% rise in costs to $496 per ounce. Margins came in at a higher rate of 31% versus 26% in the second quarter of 2009.
 
Region Details
 
US: Kinross operates 3 major mines in the US namely, Fort Knox, Round Mountain and Kettle River-Buckhorn. In the second quarter of 2010, sales went up 25% to 179,811 ounces of gold on production of 183,660 ounces, up 20% year over year. At Fort Knox, Kinross sold 80,999 ounces of gold against production of 86,270 ounces. Sales and production increased 28% each at costs of $642 per ounce (up 19% from $541 per ounce in the year-ago quarter) in the reported quarter.

At Kettle River, sales almost doubled to 53,364 ounces of gold from 27,414 ounces in the year-ago period. Production was up 49% to 50,463 ounces at costs of $570 per ounce. However, at the Round Mountain mine, sales declined 14% to 45,448 ounces while production decreased 9% to 46,927 ounces. Costs were up modestly at $307 per ounce.
 
Russia: Kinross holds 75% interest in the Kupol mine in Russia, where sales went down by 24% to 205,670 ounces on production of 187,025 ounces, 20% decline year over year. The decline in sales and production was attributable to lower ore grades at the mine. Cost shot up 19% to $307 per ounce.
 
Brazil: In Brazil, Kinross owns two mines - Paracatu and Crixas. At Paracatu, sales volume shot up by 29% to 119,531 ounces while production grew by 35%. At Crixas, Kinross sold 16,751 ounces of gold on production of 18,076 ounces. Both sales and production were lower than last year’s levels. Cost of $525 per ounce at each of the mines was 25% lower in Paracatu and 24% higher in Crixas, year over year. Increasing production led to lower costs in Paracatu.
 
Chile: At the La Coipa mine in Chile, Kinross recorded sales volume of 38,663 ounces, a significant decline of 42% year over year. Production (35,175 ounces) showed a similar trend while cost more than doubled to $822 per ounce. Lower filter plant capacity impacted production at the mine thereby increasing costs. At the Maricunga mine, sales were down 27% to 42,950 ounces while production declined 28% to 42,990 ounces. Costs escalated 32% to $680 per ounce. Restricted supply of ores and production outages at the Verde pits led to lower production and higher costs.
 
 
Financial Review
 
Kinross continues to realize the benefits of its growth strategy. Stronger gold prices have led to the increase in revenue and cash flow before changes in working capital. Adjusted operating cash flow of $271.4 million or 39 cents per share was up 20% from $227.1 million, or 33 cents in the same quarter of the previous year. Cash and cash equivalents were $694.8 million against total debt of $711 million as of June 30, 2010.
 
Outlook
 
Kinross expects production of about 2.2 million ounces of gold in 2010 at a cost of $460-490 per ounce. The company expects costs to average at the higher end of the range. In Chile, Kinross expects production of 350,000-380,000 ounces of gold at an average cost of $630-680 per ounce, down from the initial forecasts of 460,000-480,000 ounces at an average cost of sales of $500-520 per ounce.
 
Acquisitions and Divestures
 
Recently, Kinross is acquiring a leading African gold producer Red Back Mining Inc. for $7.1 billion. Kinross expects to benefit from Red Backs’ Chirano Gold Project in Ghana and the Tasiast Gold Mine in Mauritania. To consolidate its position in the Kupol mine, Kinross plans to acquire B2Gold Corp.’s right to acquire an interest in the Kupol East and West exploration licenses.
 
Kinross has divested its 19.9% interest in Harry Winston Diamond Corporation, a Canada based diamond mining and retail company for $186 million. Kinross also has plans to sell its interest in the Diavik Diamond Mine joint venture for $220 million.
 
Zacks Recommendation
 
Kinross Gold Corporation, like other gold producers, Barrick Gold Corporation (ABX) and Newmont Gold Mining (NEM) benefits from rising gold prices. We expect Kinross’ exploration projects and acquisitions to boost its top line going forward. The Bema Gold Corp. acquisition was a major contributor to Kinross’ profits in the recent past. Kinross has cleared its hedge book and stands fully levered to spot gold prices.
 
However, production levels are shrinking at some of Kinross’ existing operations. About 40% of Kinross’ gold reserves are located in Chile, which is presently experiencing significant production declines. Another 40% reserves are located in Russia, which is also witnessing lower output levels due to poor ore grades. We expect higher mining and administrative costs to further constrain margins.
 
Kinross has posted a negative earnings surprise of 25.48% over the last four quarter on an average. The Zacks Consensus Estimate is pegged at 18 and 67 cents for the upcoming quarter and full year 2010, with an upside potential of 11.11% and 5.97%,  respectively. Kinross’ volatile earnings trend is reflected in its share prices.
 
Currently, KGC has a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term Neutral recommendation.
 

 
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